[Federal Register Volume 68, Number 72 (Tuesday, April 15, 2003)]
[Notices]
[Pages 18313-18315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9109]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47650; File No. SR-MSRB-2003-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Rule G-14, 
on Reports of Sales or Purchases

April 8, 2003.
    Pursuant to section 19(b)(1) of the Securities and Exchange Act of 
1934 (the ``Exchange Act'') and Rule 19b-4 thereunder,\1\ notice is 
hereby given that on April 7, 2003, the Municipal Securities Rulemaking 
Board (``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-MSRB-2003-02) (the 
``proposed rule change'') described in Items I, II, and III below, 
which Items have been prepared by the MSRB. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4 thereunder.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed with the Commission a proposed rule change with 
regard to Rule G-14, on reports of sales or purchases, to increase 
transparency in the municipal securities market. The proposed rule 
change would not change the wording of Rule G-14.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in Section A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to increase price 
transparency for municipal securities by increasing the amount of price 
data available on the day after trade date.

Background Information

    Since the implementation of the inter-dealer trade reporting system 
in 1995, the MSRB has been increasing price transparency in the 
municipal securities market in measured steps.\2\ The first price 
transparency report was a T+1 report that summarized high, low and 
average inter-dealer prices for issues that met a trading threshold of 
four or more trades in the inter-dealer market. In 1998, the MSRB 
implemented the customer transaction reporting system and customer 
transaction data was added to the T+1 summary report. The trading 
threshold of four trades was retained, but since it applied regardless 
of whether the trades were inter-dealer or customer, many more issues 
met the trading threshold and were subject to price reporting. In 
January 2000, the MSRB further enhanced the T+1 report by publishing 
individual transaction data (rather than high, low and average prices) 
for each issue contained in the report.
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    \2\ This plan has been discussed in many notices since 1994. 
See, e.g., ``Board to Proceed with Pilot Program to Disseminate 
Inter-Dealer Transaction Information,'' MSRB Reports, Vol. 14, No. 1 
(January 1994).
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    In October 2000 the MSRB began offering a comprehensive transaction 
report, which lists all municipal securities transactions (regardless 
of frequency of trading) and includes late-reported trades, inter-
dealer trades compared after trade date, and transaction data corrected 
by dealers after trade date. The Comprehensive Report began with a 
minimum one-month delay in trade publication. That delay has gradually 
been reduced such that the report currently is disseminated on a daily 
basis, one week after trade date. To make more trade data available on 
a T+1 basis, in 2002, the MSRB began the process of lowering the 
trading threshold in the T+1 Daily Report. In May 2002, the MSRB 
changed the trading threshold to three trades.\3\ In November 2002, the 
trading threshold was lowered to two trades.\4\
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    \3\ See Release No. 34-45861 (May 1, 2002), 67 FR 30989.
    \4\ See Release No. 34-46819 (November 12, 2002), 67 FR 69779.
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    The T+1 Daily Report and the Comprehensive Report have been well 
received by market professionals seeking information on market price 
levels and trading activity for individual securities.\5\ The reports 
have garnered greater and greater use over time, both with market 
professionals and through free, customer-oriented outlets such as 
``InvestingInBonds.com'' operated by The Bond Market Association 
(``TBMA''). At this time, in preparation for the move to real-time 
price transparency in mid-2004, the MSRB believes that the trading 
threshold in the T+1 Daily Reports should be eliminated to further 
increase the price transparency that is available on T+1.
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    \5\ Currently, the MSRB has twenty-four subscribers to the T+1 
Daily Report and fifty-one to Comprehensive Report.
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Proposed Changes in the T+1 Daily Report

    The MSRB has noted since the outset of its transparency initiative 
that, as the market obtains experience with price transparency, price 
reports eventually would need to occur on a more contemporaneous and 
comprehensive basis, culminating with real-time transaction 
reporting.\6\ The proposal to change the T+1 Daily Report at this time 
is part of the MSRB's longstanding plan to introduce transparency in 
measured steps, allowing the market time to adjust to new situations 
presented by each new level of price transparency. As an example, when 
price reports were first introduced in 1995, the MSRB was concerned 
that an observer might be misled if he or she considered an isolated 
transaction or pair of transactions as providing the same

[[Page 18314]]

indicator of ``market price'' as a stock exchange quotation. The MSRB 
believes that, considering the unique nature of the municipal 
securities market, the market has adapted very well to price 
transparency. The MSRB is not aware of any problems occurring similar 
to the concerns expressed in 1995. The reception of the Comprehensive 
Report and the previous lowering of trading thresholds on the T+1 Daily 
Report has been positive and the use of the data in those reports by 
market professionals and pricing services has increased the efficiency 
and accuracy with which issues are priced in the secondary market.
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    \6\ See, e.g., ``Board to Proceed with Pilot Program to 
Disseminate Inter-Dealer Transaction Information,'' MSRB Reports, 
Vol. 14, No. 1 (January 1994).
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    The proposed rule change would increase substantially the number of 
trades and issues appearing each day on the T+1 Daily Report. On a 
typical trading day, dealers report approximately 26,000 transactions 
in 10,000 issues, with a total par value traded of about $9.5 
billion.\7\ The present T+1 Daily Report, with a trading threshold of 
two or more trades per day, includes an average of 19,760 trades in 
5,600 issues, with a total par value of about $7.7 billion. Currently, 
only about 76% of transactions reported on trade date are shown on the 
report. Under the proposed rule change, all trades reported by dealers 
on trade date would be made visible on T+1.
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    \7\ This baseline data is based upon market activity from April 
1, 2001 through July 31, 2001.
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    Although the MSRB believes it is appropriate to increase T+1 
transparency at this time, and to move forward with its plans for real-
time trade reporting in mid-2004, the MSRB also is mindful of concerns 
expressed by dealers that further increases in transparency on a more 
contemporaneous basis could have an effect on liquidity. One concern 
sometimes noted is that because of the nature of the municipal 
securities market, including the prevalence of thinly traded issues, it 
sometimes is possible to identify institutional investors and dealers 
by the exact par value given on trade reports. For example, it might be 
common market knowledge that a $4.25 million position in an issue 
initially was purchased in the primary market by a specific 
institution. Trade reports in the secondary market showing this exact 
par value later being sold then could reveal the identity of that party 
as well as the price received. Where the market for a specific security 
is thin and only one or two dealers are active, revealing the exact par 
amount also may convey information about a dealer's inventory (i.e., 
size of position and acquisition cost). Other dealers may use this 
information to trade against the dealer's position, reducing the 
incentive for a dealer to take large positions in these circumstances.
    In response to these concerns, the MSRB proposes to take a step 
similar to that used by the NASD's ``TRACE'' system in the corporate 
bond market and to display par value of large trades with a large trade 
indicator rather than the exact par value.\8\ While this will result in 
less information being made visible on T+1 about par value traded, the 
MSRB believes that it will help to preserve the anonymity of trading 
parties and will not detract in a substantial way from the benefits of 
the price transparency it provides.
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    \8\ See NASD Notice to Members 01-18, ``Fixed Income Transaction 
Reporting and Dissemiantion,'' March 2001.
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    The enhanced Daily Report with the frequently traded threshold 
removed would replace the current T+1 Daily Report and would be made 
available each day to subscribers via the Internet. Subscribers to the 
current Service receive the report free of charge, and their 
subscriptions would continue. New subscriptions would continue to be 
available free to parties who sign a subscription agreement. In 
addition, recent reports would continue to be available for 
examination, also free of charge, at the MSRB's Public Access Facility 
in Alexandria, VA.
    The MSRB will continue to produce its Comprehensive Report on a 
one-week delay basis with details about all transactions traded one-
week prior. The Comprehensive Report will continue to provide 
information on the size of each transaction including the exact par 
amount reported to the MSRB on transactions in amounts greater than one 
million dollars. The Comprehensive Report also will continue to be 
useful since it will include details of transactions reported to the 
MSRB late, inter-dealer trades compared after trade date, and any 
transaction data corrected by dealers after trade date.

Implementation Schedule

    The enhanced report would be available to subscribers as soon as 
practical after Commission approval of the proposed rule change. It is 
estimated that the period between approval and implementation would not 
exceed four weeks.
2. Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(I) of the Exchange Act, which authorizes the MSRB to adopt 
rules that provide for the operation and administration of the Board.

B. Self-regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change will impose 
any burden on competition in that it applies equally to all dealers in 
municipal securities.

C. Self-Regulatory Organization's Statement of Comments on the Proposed 
Rule Change Received From Member, Participants, or Others

    Written comments on the proposed rule change were not solicited, 
but the MSRB had earlier received a copy of a comment letter from TBMA 
to the Commission in reference to proposed rule change SR-MSRB-2002-07 
regarding shortening the delay in publication of the Comprehensive 
Report from two weeks after trade date to a one-week delay.\9\ In its 
letter, the TBMA expressed its continued support for the MSRB's steps 
to expand transparency in the municipal securities market. TBMA also 
stated a concern that price dissemination on a next-day basis for all 
issues that trade only once per day would not necessarily provide 
useful information to investors and other market participants or could 
adversely affect liquidity or might be misleading.
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    \9\ See letter from Frank Chin, Chair, Municipal Executive 
Committee, TBMA, to Jonathan G. Katz, Secretary, Commission, dated 
August 8, 2002.
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    As noted above, the final reduction of the T+1 trading threshold is 
part of a long-term plan for measured increases in transparency. The 
Board believes that prior experience with the program indicates both 
that the additional information provided by the proposed rule change 
will be useful and will not be misconstrued by users of the data, who 
now have experience with the price information and know how to 
interpret it.
    As noted above, the MSRB also has considered the concerns expressed 
by the TBMA that further increases in transparency on a more 
contemporaneous basis could have an effect on liquidity. The MSRB 
believes that the proposal to display par value of transactions over 
one million dollars with a large trade indicator rather than exact par 
value will ameliorate these concerns.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal

[[Page 18315]]

Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the forgoing. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the MSRB's principal offices. 
All submissions should refer to File No. SR-MSRB-2002-14 and should be 
submitted by May 6, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9109 Filed 4-14-03; 8:45 am]
BILLING CODE 8010-01-P